DERMTECH, INC. The following Discussion and Analysis of Financial Condition and Results of Operations ofDermTech, Inc. (together with its subsidiaries, "DermTech ," "we," "us," "our" or the "Company") should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited condensed consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year endedDecember 31, 2022 , included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission , (the "SEC") onMarch 2, 2023 .
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, including the following Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are intended to be covered by the "safe harbor" created by those sections. All statements, other than statements of historical facts, contained in this report, including statements regardingDermTech's or its management's intentions, beliefs, expectations and strategies for the future, are forward looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "will," "expect," "plan," "anticipate," "believe," "estimate," "intend," "potential," "could," "would," or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements are made as of the date of this report, deal with future events, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in those forward-looking statements. The risks and uncertainties that could cause actual results to differ materially are more fully described under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . We may disclose changes to risk factors or additional risk factors from time to time in our future filings with theSEC . We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.
Overview
We are a molecular diagnostic company developing and marketing novel
non-invasive genomics tests to aid in the diagnosis and management of skin
cancer, inflammatory skin diseases, and aging-related skin conditions. Our
technology enhances early melanoma detection by non-invasively detecting genomic
markers associated with melanoma to identify higher risk lesions at their
earliest stages to rule out melanoma with a greater than 99% negative predictive
value ("NPV") (Gerami et al. J Am Acad Dermatol. 2017; Skelsey et al. SKIN.
2021). Our scalable genomics assays have been designed to work with our adhesive
patch, the DermTech Smart StickerTM (the "Smart Sticker") which is used to
non-invasively collect skin tissue samples for analysis.
We are initially commercializing tests that will address unmet needs in the
diagnostic pathway of pigmented skin lesions, such as moles or dark colored skin
spots. The DMT facilitates the clinical assessment of pigmented skin lesions for
melanoma. We initially marketed this test directly to a concentrated group of
dermatologists and are currently expanding marketing efforts to a broader group
of clinicians and to a small group of primary care providers. The application of
our Smart Sticker to collect samples non-invasively may allow us to eventually
market the DMT to primary care physicians more broadly, beyond integrated
primary care networks, and expand our efforts through telemedicine channels. We
process our tests in our high complexity molecular laboratory that is certified
under CLIA, College of American Pathologists accredited and New York licensed.
We also provide laboratory services to several pharmaceutical companies that
access our technology on a contract basis for their clinical trials or other
studies to advance new drugs.
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Events, Trends and Uncertainties
The DMT without the additional test for the presence of telomerase reverse
transcriptase gene driver mutations ("TERT") (formerly known as PLAplus) became
eligible for Medicare reimbursement on February 10, 2020 . Each reference to the
DMT in this paragraph refers only to the DMT without the add-on test for TERT.
In late October 2019 , the American Medical Association provided us with a
Proprietary Laboratory Analyses Code ("PLA Code"). Pricing of $760 for the PLA
Code was published on December 24, 2019 as part of the Clinical Laboratory Fee
Schedule for 2020. The final Local Coverage Determination ("LCD") expanded the
coverage proposal in the draft LCD from one to two tests per date of service,
and it allows clinicians to order the DMT if they have sufficient skill and
experience to decide whether a pigmented lesion should be biopsied. Our local
Medicare Administrative Contractor, Noridian, has issued its own LCD
("Noridian's LCD") announcing coverage of the DMT. Even though the effective
date of Noridian's LCD was June 7, 2020 , Noridian began reimbursing us for the
DMT as of February 10, 2020 . With Medicare coverage granted, we have the
opportunity to approach commercial payors, and, as a result, we believe that the
DMT may generate significant revenues in the future. No LCD currently covers the
optional add-on test for TERT available to those ordering the DMT.
Despite the grant of Medicare coverage for the DMT (without the add-on test for
TERT), uncertainty surrounds commercial payor reimbursement, including
governmental and commercial payors, of any test incorporating new technology,
including tests developed using our technologies. Because each payor generally
determines for its own enrollees or insured patients whether to cover or
otherwise establish a policy to reimburse our tests, seeking payor approvals is
a time-consuming and costly process. We cannot be certain that coverage for our
current tests and our planned tests will be provided in the future by additional
commercial payors or that existing policy decisions or reimbursement levels will
remain in place or be fulfilled under existing terms and provisions. If we
cannot obtain or maintain coverage and reimbursement from private and
governmental payors, such as Medicare and Medicaid, for our current tests, or
new tests or test enhancements, our ability to generate revenues could be
limited. This may have a material adverse effect on our business, financial
condition, results of operation and cash flows.
Contract Revenue
Contract revenues with pharmaceutical companies relate to ongoing clinical trial contracts and new contracts. Contract revenue can be highly variable as it is dependent on the pharmaceutical customers' clinical trial progress, which can be difficult to forecast due to variability of patient enrollment, drug safety and efficacy and other factors. Many of our historical contracts with third parties were structured to contain milestone billing payments, which typically are advance payments on work yet to be performed. These advanced payments are structured to help fund operations and are included in deferred revenue as the work has not yet been performed. These advance payments will remain in deferred revenue until we process the laboratory portion of the contracts allowing us to recognize the revenue.
Supply Chain and Inflationary Environment
Global supply chain disruptions and the higher inflationary environment have resulted in higher prices, which could impact our liquidity, business, financial condition and results of operations.
Financial Overview
Revenue
We generate revenue through laboratory services that are billed to Medicare,
private medical insurance companies and pharmaceutical companies who order our
laboratory services, which can include sample collection kits, test development,
patient segmentation and stratification, genomic analysis, data analysis and
reporting. Our revenue is generated from two revenue streams: test revenue and
contract revenue. Test revenue can be highly variable as it is based on payments
received by government and private insurance payors that are and are not under
contract and can vary based on patient insurance coverage, deductibles and
co-pays. As much of our test revenue is driven by the samples that are sent by
physicians to our central lab for testing, a key performance measure for us is
samples that are received and processed by our central lab successfully, also
known as billable samples. We are currently prioritizing volume in geographies
where we have payer coverage versus overall volume growth as one factor to
potentially increase average selling price and help preserve our cash runway. We
recently stopped testing samples from pediatric patients and certain Fitzpatrick
skin types based on guidance from our lab accrediting organization. We are
working on a plan to reintroduce testing for these cohorts with extremely low
prevalence of melanoma. Based on these factors, we expect test volumes in 2023
to be affected.
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Our laboratory services are ordered by customers on projects that may span over several years, which makes our contract revenue highly variable. Segments of these contracts may be increased, delayed or eliminated based on the success of our customers' clinical trials or other factors.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses are primarily related to our specialty field sales force, market research, reimbursement efforts, conference attendance, public relations, advertising and general marketing.
Research and Development Expenses
Our research and development ("R&D") expenses consist primarily of salaries and
fringe benefits, clinical trials, consulting costs, facilities costs, laboratory
costs, equipment expense and depreciation. We also conduct clinical trials to
validate the performance characteristics of our tests and to show medical cost
benefit in support of our reimbursement efforts.
General and Administrative Expenses
Our general and administrative expenses consist of senior management compensation, consulting, legal, billing and collections, human resources, information technology, accounting, insurance, and general business expenses.
Financing Activities 2020 At-The-Market Offering OnNovember 10, 2020 , the Company entered into a sales agreement withCowen and Company, LLC ("Cowen") relating to the sale of shares of the Company's common stock from time to time with an aggregate offering price of up to$50.0 million (the "2020 Sales Agreement"). ThroughDecember 31, 2021 , the Company issued an aggregate of 1,482,343 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of$30.05 , net of$1.6 million in issuance costs resulting in net proceeds to the Company of approximately$42.9 million . During 2022, the Company did not issue or sell any shares of common stock pursuant to the 2020 Sales Agreement. For the three months endedMarch 31, 2023 , the Company issued an aggregate of 107,451 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of$3.68 resulting in net proceeds of approximately$0.3 million . As ofMarch 31, 2023 ,$5.1 million is available pursuant to the 2020 Sales Agreement.
2022 At-The-Market Offering
On
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Results of Operations
Three Months Ended
(In thousands, except per share amounts and
billable test revenue samples) Three Months Ended March 31,
2023 2022 $ Change % Change
Revenues:
Test revenue $ 3,425 $ 3,518 $ (93) (3) %
Contract revenue 52 200 (148) (74) %
Total revenues 3,477 3,718 (241) (6) %
Cost of revenues:
Cost of test revenue 3,791 3,530 261 7 %
Cost of contract revenue 30 24 6 25 %
Total cost of revenues 3,821 3,554 267 8 %
Gross (loss) profit (344) 164 (508) *
Gross (loss) profit as a percent of total
revenue (10) % 4 %
Operating expenses:
Sales and marketing 15,417 15,443 (26) - %
Research and development 4,409 6,338 (1,929) (30) %
General and administrative 11,875 8,574 3,301 39 %
Total operating expenses 31,701 30,355 1,346 4 %
Loss from operations (32,045) (30,191) (1,854) 6 %
Other income/(expense):
Interest income, net 782 66 716 *
Change in fair value of warrant liability (7) 17 (24) *
Total other income 775 83 692 *
Net loss $ (31,270) $ (30,108) $ (1,162) 4 %
Basic and diluted net loss per share
$ (0.01) 1 % Other Operating Data: Billable test revenue samples 17,800 14,370 3,430 24 %
* Absolute value percentage change greater than 100
Revenue Test Revenue Test revenues decreased$0.1 million , or 3%, to$3.4 million for the three months endedMarch 31, 2023 compared to$3.5 million for the three months endedMarch 31, 2022 . The decrease in test revenues was primarily driven by a decrease in average selling price, partially offset by increased billable sample volume. Billable samples increased to approximately 17,800 for the three months endedMarch 31, 2023 compared to approximately 14,370 for the three months endedMarch 31, 2022 . Sample volume is dependent on two major factors: the number of clinicians who order a test in any given quarter and the number of tests ordered by each clinician during the period. The number of ordering clinicians and the utilization per clinician can vary based on a number of factors, including the types of skin cancer conditions presented to clinicians, clinician reimbursement, office workflow, market awareness, clinician education and other factors. Contract Revenue Contract revenues with pharmaceutical companies decreased$0.1 million , or 74%, to$0.1 million for the three months endedMarch 31, 2023 , compared to$0.2 million for the three months endedMarch 31, 2022 . Contract revenues can be highly variable as it is dependent on the pharmaceutical customers' clinical trial progress, which can be difficult to forecast due to variability of patient enrollment, drug safety and efficacy and other factors. 19
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Cost of Revenue
Cost of revenues increased$0.3 million , or 8%, to$3.8 million for the three months endedMarch 31, 2023 compared to$3.6 million for the three months endedMarch 31, 2022 . The increase was largely attributable to a higher billable sample volume in 2023, higher overhead costs, one-time moving costs pertaining to our new facility, partially offset by streamlined laboratory processes. As ofMarch 31, 2023 , a large portion of the costs of revenue are fixed, and these costs include the CLIA facility, quality assurance, management and supervision and equipment calibration and depreciation. The variable cost of revenue expenses incurred primarily relate to compensation-related costs for our laboratory scientists and technicians, laboratory supplies, shipping costs and Smart Sticker collection kits. We remain committed to continuing the automation of our laboratory processes in order to become more cost efficient and productive. Operating Expenses Sales and Marketing
Sales and marketing expenses were flat at
Research and Development
R&D expenses decreased$1.9 million , or 30%, to$4.4 million for the three months endedMarch 31, 2023 compared to$6.3 million for the three months endedMarch 31, 2022 . The decrease was due to lower compensation costs from reduced headcount, lower lab supply spending and lower clinical study costs.
General and Administrative
General and administrative expenses increased$3.3 million , or 39%, to$11.9 million for the three months endedMarch 31, 2023 compared to$8.6 million for the three months endedMarch 31, 2022 . The increase was primarily due to higher overhead from our new facility and higher employee compensation related costs as we added infrastructure such as information technology, legal and billing resources throughout 2022.
Interest Income, net
Interest income, net of$0.8 million and$0.1 million for the three months endedMarch 31, 2023 and 2022, respectively, consists primarily of interest earned on our short-term marketable securities.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability for the three months endedMarch 31, 2023 was a loss of$7,000 compared to a gain of$17,000 for the three months endedMarch 31, 2022 . The change in fair value of warrant liability is calculated by adjusting the value of the outstanding Private SPAC Warrants held by original holders to the current market value at each reporting period.
Liquidity and Capital Resources
We have never been profitable and have historically incurred substantial net losses, including net losses of$116.7 million for the twelve months endedDecember 31, 2022 and$31.3 million for the three months endedMarch 31, 2023 . As ofMarch 31, 2023 , our accumulated deficit was$354.3 million . At the end of 2020, throughout 2021 and the first quarter of 2023, we raised approximately$44.9 million in gross proceeds facilitated through our at-the-market offering. In addition, we completed an underwritten public offering inJanuary 2021 , which raised a total of$143.7 million in gross proceeds. We have historically financed operations through private placement and public equity offerings. We expect our losses to continue as a result of costs relating to ongoing R&D expenses, general and administrative expenses and sales and marketing costs for existing and planned products. These losses have had, and will continue to have, an adverse effect on our working capital. Because of the numerous risks and uncertainties associated with our commercialization and development efforts, we are unable to predict when we will become profitable, and we may never become profitable. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows. 20
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As ofMarch 31, 2023 , our cash and cash equivalents totaled approximately$48.4 million and short-term marketable securities totaled approximately$56.3 million . Based on our current business operations, we believe our current cash, cash equivalents and short-term marketable securities will be sufficient to meet our anticipated cash requirements for at least the next 12 months. While we believe we have enough capital to fund anticipated operating costs for at least the next 12 months, we expect to incur significant additional operating losses over at least the next several years. We anticipate that we will raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements in order to support our planned operations and to continue developing and commercializing genomic tests. We may also consider raising additional capital in the future to expand our business and to pursue strategic investments. Our present and future funding requirements will depend on many factors, including:
•our revenue growth rate and ability to generate cash flows from operating activities;
•our sales and marketing and R&D activities;
•effects of competing technological and market developments;
•costs of and potential delays in product development;
•changes in regulatory oversight applicable to our tests; and
•timing of and costs related to future international expansion.
There can be no assurances as to the availability of additional financing or the
terms upon which additional financing may be available to us. If we are unable
to obtain sufficient funding at acceptable terms, we may be forced to
significantly curtail our operations, and lack of sufficient funding may have a
material adverse impact on our ability to continue as a going concern.
Cash Flow Analysis
(amounts in thousands) Three Months Ended March 31,
2023 2022
Net cash used in operating activities $ (22,028) $ (24,823)
Net cash used in investing activities (8,194) (7,533)
Net cash provided by financing activities 916
527
Net cash used in operating activities for the three months endedMarch 31, 2023 totaled$22.0 million , primarily driven by the$31.3 million net loss, offset partially by non-cash related items, including$4.7 million in stock-based compensation,$1.2 million in amortization of operating lease ROU assets and$0.5 million in depreciation. In addition, we had a net cash inflow of$2.9 million through net changes in working capital balances driven primarily by cash inflows of$0.5 million due to decreases in accounts receivable,$1.6 million through the decrease of prepaid expenses and other current assets and$1.3 million through the increase accrued liabilities, partially offset by cash outflows of$0.3 million from the increase in accrued compensation and$0.7 million from the increase in accounts payable. Net cash used in investing activities for the three months endedMarch 31, 2023 totaled$8.2 million , which related to the outflow from the purchase of$16.5 million of marketable securities and$0.8 million from the purchase of equipment offset by the inflow from the sales and maturities of marketable securities of$9.0 million . Additional laboratory equipment investment will be needed to install complex automation systems and other genomic testing equipment needed to expand testing capacity.
Net cash provided by financing activities for the three months ended
Off-Balance Sheet Arrangements
As ofMarch 31, 2023 , we did not have any off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. 21
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Critical Accounting Policies and Significant Judgments and Estimates
Critical accounting policies, significant judgments and estimates are those that we believe are most important for the portrayal of the Company's financial condition and results and that require management's most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting estimates previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 .
Recent Accounting Pronouncements
See Item 1 of Part I, Note 1(h) of the condensed consolidated financial statements herein.
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